In: Economics
1. Costs are in hours/unit output. PLEASE SHOW ALL WORK/HOW YOU GOT YOUR ANSWERS.
Table 1 |
Honey |
Tea |
INDIA |
1 |
1/3 |
WALES |
1/6 |
1/4 |
a. Who has the absolute advantage in Honey and Tea? How can you tell?
Honey ____________________ Tea_____________________
b. Find the opportunity cost of producing Honey and Tea.
INDIA Honey__________ Tea___________ WALES Honey___________ Tea___________
c. In which good does INDIA and WALES have a comparative advantage?
INDIA ____________________ WALES ____________________
d. What are the limits for the price of Honey in terms of Tea (PH = #T/H) in which trade will be mutually advantageous?
e. How many hours will INDIA and WALES gain if 6H are exchanged for 6T?
INDIA ____________________ WALES ____________________
a) India can produce 1 unit of honey or 3 units of tea in 1 hour while Wales can produce 6 units of honey or 4 units of tea. This shows that Wales can produce more honey and tea in 1 hour, so Wales has absolute advantage in both honey and tea.
b) India can produce 1 unit of honey or 3 units of tea in 1 hour . Hence, in India, the opportunity cost of producing 1 unit of tea is 1/3 = 0.33 units of honey and the opportunity cost of producing 1 unit of honey is 3 units of tea. Wales can produce 6 units of honey or 4 units of tea. Hence, in wales, the opportunity cost of producing 1 unit of tea is 6/4 = 1.5 units of honey and the opportunity cost of producing 1 unit of honey is 4/6 = 0.67 units of tea.
c) India has comparative advantage in tea since it has a lower opportunity cost of producing tea at 0.33 units of honey. Wales has comparative advantage in honey since it has a lower opportunity cost of producing hone at 0.67 units of tea.
d) The trade price of honey lies between its opportunity cost which lies between 0.67 units of tea and 3 units of tea.
e) Under trade India will produce only tea and Wales would produce only honey. When exchange rate is 6H for 6T, India (by producing 6 units of tea) gains 4 units of honey, and Wales (by producing 6 units of honey) gains 2 units of tea.